Ha-Joon Chang is one of the world’s most famous economists – but he is considered an outsider within the profession, deliberately avoids using equations, and thinks the economics establishment has too many “idiot savants, who are most accomplished mathematicians but don’t understand anything about the real economy.”
His latest book deals with what economics was, what it is today, and what he thinks it ought to be. He will also be joining Byline soon for regular Q&A sessions in the members’ area, to raise money for various causes.
We recently interviewed him in the lobby of the Radisson Hotel, in Manchester – ironically, the site of the old Free Trade Hall. Here’s what he had to say:
You’re known for being a so-called ‘heterodox’ economist, but your latest book, ‘Economics: The User’s Guide’ takes on economics itself as a discipline. What is wrong with economics as practiced today?
First of all, this notion of ‘orthodoxy’ and heterodoxy is a relative thing – if you’re a member of the Greek or Russian Orthodox Church, the Pope is the heterodox guy! At least within development economics, what I do used to be the orthodoxy.
I don’t believe neo-classical economics is completely flawed. The problem with neoclassical economics is that there’s this delusion that it’s the only way to understand the economy, and so in the book I talk about no less than nine schools of economic thought. The point I’m trying to make is that there are many different ways of doing economics; each of these has strengths and weaknesses, because they are interested in different things and approach them in different ways.
Different theories conceptualise the economy differently, so classical theory, Keynesian theory, and of course Marxist theory, they are all class-based theories; neo-classical and Austrian theories are individualist theories, but then even if they are both individualist, they have different conceptions of the individual. In neoclassical economics the individual already has their own given preferences and these are not to be questioned, but in Austrian economics the individual is very much a social being. Hayek once famously said that tradition and customs lie between instinct and reason. He believed that rational behaviour is only possible because we accept a lot of things as given, because our mental capacity is not sufficient. So even though they’re both individualist theories, they come from different conceptions of the individual.
If you want to regulate monopoly pricing by energy companies then yes, you absolutely need neoclassical theory. But neoclassical theory is quite useless when understanding the decline of companies like Kodak, which was once synonymous with the product – Kodak was the camera. Neoclassical economics has nothing to say about this, because it is not really interested in the matter.
Many critics of neoclassical theory are Marxists, Keynesians, or sometimes Austrians, and they attack neoclassical economics because they think they’ve got the truth. In my case I’ve been attacking neoclassical theory because it has provided poor solutions to the kind of problems I’m interested in –namely, how a poor country can industrialise and transform its economy, and how long term industry dynamics work, creating new industries and wiping out others. For the questions I’m mainly interested in, neoclassical economics is quite weak. It isn’t that I’m criticizing it because I think I have the truth.
So in this book I’m trying to say that there are different ways of doing economics, and all of them have their strengths and weaknesses. This is related to the way I define economics. Economics is very unusual, because today the dominant school of economics (neoclassical) defines economics mainly in terms of its methodology, that is, rational choice theory. That’s why you have economics books like ‘Freakonomics’, which contain very little of what people normally think of as economics.
I’m trying to remind people that the way neoclassical economists have defined the subject is very peculiar because all other disciplines are defined by the field of inquiry. Chemistry is the study of chemicals, biology is the study of living things, so I think economics should be the study of the economy. Exactly how you study it doesn’t really matter.
So they’ve taken a particular method and applied it to a limitless range of fields…
Exactly, so this is why there are so many economics books with ‘Everything’ in their titles. Its partly arrogance bordering on megalomania. But for them, what defines economics is the way of explanation, rather than what is being explained. So in my view we have to change this definition of the subject. I’ve talked to some neoclassical economists who agree with me on this.
It has led to what some call ‘economics imperialism’. There’s an economics of family, marriage, love, and everything. What arrogance! But it’s a very particular type of arrogance that comes from a strange definition of the subject, and this obsession with rational choice theory.
This word, ‘rational’ – it doesn’t always apply well to humans, does it?
Exactly. It comes from the fact that neoclassical economics has been obsessed with this notion of economics as a science. But Marx also styled himself as a scientific socialist against other utopian socialists. Classical economists talked about ‘the iron law’ of this-and-that. There’s this strong current that makes economists believe that they are doing science. But my point in the book is that economics can never be a science because it contains a lot of ethical and political assumptions.
Is economics necessarily political?
Yes. Above all, the market itself is a political construct. 200 years ago a lot of very respectable people in cities like this one (Manchester) believed in the slave trade, child labour, and so on. There were those who objected to restrictions on child labour on the grounds that it undermines the very foundation of the free market economy, namely the freedom to make the contract. But now you don’t meet free market economists who want to bring back child labour – though Newt Gingrich almost said that, he said poor children should work as janitors in schools…
Different theories make different ethical and political assumptions, so even if you agree with the logic of the theory, you might not agree with the theory. Hayek is a very good example: Hayek is one of the most profound thinkers in the history of economics, but for him, the protection of private property rights has to trump everything, so he was openly supportive of the Pinochet regime in Chile. If you’re trying to protect the right of people to freely use their property, which for him is the greatest value, then what are the lives of three thousand people?
Even if all these theories look very dry, every theory has a notion of what makes a good society behind it. So neoclassical economists want more consumption and leisure time, and Marxists talk about the value of work itself.
So let’s call what it is, political economy! In the 18th and 19th century, you know, Adam Smith, David Ricardo, they never wrote anything on economics, they were writing on political economy. People used to be more honest in the past. They didn’t have a Ministry of Defence, they had a Ministry of War – because that was what it did…
Your book seems like an attempt at mass communication – a lot of bullet points, summaries, etc. Are you hoping we all get interested in economics? And if so, why?
Unless people get more actively involved in public debate on economic issues, our democracy will be crippled. A lot of people have this impression that economics is too technical, and a lot of economists say ‘it’s too technical, you wouldn’t understand it even if I tried to explain it to you, so don’t worry about it! Trust me, I’m an economist!’
We’ve seen the most dramatic manifestation of this at the height of the Eurozone crisis, the EU and IMF imposing unelected politicians on countries, like Monti in Italy and Papademos in Greece. I know Monti a little bit and he’s a really decent human being and a competent economist, so give me Monti over Berlusconi any day, but you can’t do it that way! It’s very anti-democratic.
Economists have this arrogance that they know the truth, and ordinary mortals cannot possibly understand what they are doing. A lot of economists can’t quite bring themselves to say it, but they believe that democracy is a bad thing because it allows ‘ignorant’ people to meddle around with the ‘scientific’ work they are doing.
When I say I want to make economics accessible, I don’t mean I’m looking down on my readers. At one level the stuff is much more complicated than you get in academic publications because I’m trying to tell people you have to think about the ethical foundations of economics, and the relationship between politics and economics, or ‘what is economics?’, so I don’t want this term ‘accessibility’ to get confused with ‘dumbing down’.
Does the media discourage us from thinking critically about the economy?
I think there are lots of things going on. First of all, if 99% of economists say one thing, as a financial journalist it is not easy to say ‘all these guys are wrong’. But if you think about it, in the 1950s and 60s, even fairly right wing journalists agreed that the government should pursue full employment, and were willing to accept that the welfare state should be expanded. A lot of this is due to political changes.
Also it isn’t just journalists, but also the academics – when you say things that people with money and power like, you get more exposure. You are taken more seriously, get invited to more important events, and you get more influence. In this way, the system is biased towards people saying things that are more defensive of the status quo, more defensive towards those with money and power.
Does the neoclassical orthodoxy misunderstand the way the world works?
All these theories, Keynesian, Marxist, and so on, they all have particular ways of seeing the world; they’re good for some issues and bad for others. So it’s not unique to neoclassical economics. But yes, the fundamental assumptions of Neoclassical economics have serious problems. This view that individuals are born with given preferences and tend to be selfish; there are some neoclassical economists who accept that some people might have non-selfish motives, but they largely believe people are selfish and highly rational. Of course you observe that, in the real world, people are not rational.
The failure of financial regulation is the greatest example. In mainstream finance theory, everyone is rational; Larry Summers, way back in the 1990s, when some US congressmen asked him ‘aren’t these complicated financial derivatives going to cause a problem?’ and he said ‘no, these products are mainly traded by financial institutions that are very sophisticated, and they’ll never do anything that might harm themselves.’ So it spills into actual policy that ruins the world.
When neoclassical economists are confronted with evidence that people are altruistic, still they interpret it in terms of utility maximization, they are trying to ‘avoid guilt’, or ‘feel good’, and so on. I remember when my daughter was 14 or 15, I was trying to do her a favour, and she said ‘Dad, don’t be so selfish, you want to make yourself feel good!’ If you say that in ordinary contexts, people find it ridiculous. But many Neoclassical economists stick to this ridiculous interpretation because, without that idea of rational maximization of clearly defined, universal and quantifiable utility, neoclassical economists cannot use mathematics any more, which makes it ‘less scientific’. It’s really worrying!
There are many weaknesses with neoclassical theory, but it wouldn’t be such a problem if Neoclassical economists said ‘we are trying to understand these issues from these points of view, and we are mainly interested in changing society in this kind of way’. Unfortunately, they think that theirs is the only theory.
You could say the same with Marxist economists too.
If you were trained in mathematics, you could probably do a degree in economics without knowing about anything else whatsoever, right?
Yes! But it’s worse than that – in today’s economics profession, there’s this perverse intellectual hierarchy where the less what you do is related to the real world, the cleverer you are! If you are the cleverest you do abstract mathematical modeling, if you are a bit less clever you do econometrics, but never applied econometrics. If you are less clever, you do macroeconomics; if you are less clever than that, you do what I do, development economics; if you’re not even that clever, you become an economic historian. And if you’re running around surveying factory managers trying to understand how production is organized or how technology is advancing, they’ll think there’s something wrong with you!
If you’re good at maths, your understanding of the economy doesn’t really matter, because being good at maths is wrongly equated with being a better economist. We have all these idiot savants, who are most accomplished mathematicians but don’t understand anything about the real economy. They are not even encouraged to understand it.
Economics is playing the role of Catholic theology in medieval Europe. It is used to justify the status quo. Mathematics is today’s Latin. It was a revolution for countries to produce the Bible in vernacular languages. So let’s make economics accessible to people and let them judge. Don’t say you have to be a particular person with high mathematical ability and a job at MIT or wherever, to be able to say something about economics.
Do you teach a lot of mathematical economics?
Probably I’m one of the least mathematical economists in the world. Even though I am not against the use of mathematics in economics, I have, partly deliberately, never used a single equation in my work and use virtually none in my teaching. So, sometimes a student asks, ‘what is the economic content of your lecture?’ and I say ‘you mean mathematical content?’ and they go red. They’ve been trained to think that economics is maths, basically.
Let’s say I want to go back and do a degree in economics and do it in your way, not this abstract mathematical way?
You would have to do some maths, but in this country I would say Leeds or SOAS, and in America the New School for Social Research in New York, or University of Massachusetts, Amherst. They’ll teach you broader stuff, although in my view even they are not broad enough, because the alternatives they teach are mostly Marxist and Keynesian and they wouldn’t really teach much about Herbert Simon or Joseph Schumpeter. But at least you’d be exposed to three or four schools out of nine. On the other hand though they don’t ha ve the same market value as Harvard or MIT.
Having said that, unless you are determined to make it in academia, doing degrees in those places is not a bad career choice because people in the UN and places like that actually prefer people with that kind of education to those who just learned abstract mathematics applied mindlessly.
Are too many young people becoming investment bankers?
I think so, yeah. We absolutely need the financial industry. Without modern finance we’d still be living in the days of Adam Smith’s pin factory. Having said that, it’s grossly skewed – a lot of scientists and engineers are poached by investment banks for their mathematical abilities. The resources we have spent to train these people to a very high level has been wasted.
David King, the eminent Chemistry professor who used to be Chief Scientific Advisor to the government in the days of Tony Blair, told me that probably 60% of his PhD students were working in the financial sector. Why do you need a PhD in chemistry to do that? If you just want clever people, why not give them an IQ test when they are 7, and just hire them! It’s a waste of social resources.
How do you feel about the much-vaunted UK economic recovery?
In terms of the overall size of the economy, this country has recently got back to the level of 2007. However, in the meantime, the population has grown quite a lot, not least thanks to immigration. Thus, in terms of per capita income, we’re lower than where we were eight years ago, can you imagine! And this is before we even discuss how the recovery was concentrated in the top income groups and in London.
It’s a very uneven recovery, with people trying to make do with zero-hours contracts, self-employment out of desperation, and so on. So can we call that a recovery? As always, it depends on who you are and where you live. But what little recovery there has been is not sustainable, because its been mainly driven by house prices and other asset bubbles, and because the country has been running a huge current account deficit, the equivalent of 6% of GDP. Countries like Malaysia had that on the eve of the crisis in 1997 – even Korea’s was only about 3%. So this is apparently the second highest deficit in postwar British history. So it’s a very shaky kind of recovery, even if you ignore all the problems of inequality.
And if the next PM said ‘come to Downing St. and give me your advice…’?
First of all, I believe that academics should not be permanent advisors. I don’t mind going there once or twice, but academics in general shouldn’t be running things. It’s a bit like suddenly bringing in a biologist to become a medical doctor.
Having said that, I think the new government has to change this narrative about deficits. Why is it such a problem? UK public debt was much higher as a proportion of GDP after the Second World War. Of course they had capital controls then, so it was easier to manage – but it’s not as if this debt is crushing the economy.
Debt may be a bad thing, but it all depends on how you are spending that debt. If you are investing it to build productive capabilities for the future, it’s better to have more debt. So they have to change this narrative and talk about the other deficit – why is Britain incapable of balancing its trade even after devaluing its currency by 30%. The country’s productive basis has become so weak. Price incentives only work when you have the capacity to respond. That leads us to a debate on long term policies – you have to talk about research and development, infrastructure, skills, and various forms of industrial policy, because unless you do those things, how is this country going to pay its way in the world? How is it going to create decent jobs that give people security and a decent standard of living?
Is there a way to turn back from this idea that ‘we’re a service economy now, and making things is for China’? I always tend to think it’s too late…
Well yeah, we’ve destroyed so much of the industrial base that you can’t turn the clock back. But even within the current framework you could shift things a bit. Even if it might decrease your income a little in the short term, you have to relatively shrink the financial sector, because you have become overly specialized and if that gets hit…
It’s a basic of portfolio management, no? You don’t put too many eggs in one basket, but this country has become so absolutely dependent on finance. The relative size of the financial industry in this country is twice that of America’s. And this sector is a permanent source of instability and inequality. Apart from the financial services industry and associated industries like consulting, services is a stagnant sector that has no hope of becoming an engine of growth.
You know, this country produces about ten percent of the world’s scientific articles – but it doesn’t lead to anything in practical terms. Look at Graphene technology, discovered here at Manchester University. Britain has acquired or applied for just around 1% of 25,000 or so Graphene-related patents worldwide. The comparable figures are 6% for Japan, 18% for the US, 25% for Korea, and 29% for China. There is something wrong here!
How about Korea, though? Isn’t Korea also in huge danger of deindustrialization, and the loss of jobs?
And Korea doesn’t have a financial sector like the UK either…
Exactly. Except for the automobile industry, I think every industry is in great danger. Eventually the Chinese will catch up in the way that we have almost caught up with the Germans and Japanese. So yes, we’re in big trouble.
So what does Korea need to do?
The problem with Korea is its industrial structure. We still have what was created by Park Chung–hee. We’ve upgraded of course, but we haven’t created any new industries. Also we haven’t developed parts and components, machine industry, materials industry. If you look at Korean trade structure, we run a trade surplus with almost everyone except for oil-exporters and Japan. Oil-exporters we can understand, but why Japan? It is because we import huge amounts of machines, materials, and parts from Japan. We need to develop those, and new generation industries like biotechnology, nanotechnology, and so on.
It’s not going to be easy – you have to pour in a lot of money. But that’s how China got ahead of Korea in solar panels. It can be done and should be done, but the current Korean elite is more interested in building casinos for tourists, and turning our medical industry into an export industry. The country with the largest trade surplus in medical services is the Czech Republic, which has a trade surplus in medical services that is 45 times larger than that of Korea. Now, even if Korea can develop its medical services exports to the Czech level, trade surplus from this industry is going to only be about 1/30 of that of the surplus generated by Korea’s automobile industry today (equivalent to around 4% of GDP). They’re dreaming… they’re not serious.
But isn’t the economy too complex these days for government involvement?
Complexity cuts both ways. Economic development also increases the ability of the government. Go to poor countries, they can’t even organise the collection of rubbish! That used to be the case in Korea. With development, you develop capability, so you become able to do more complex things. People who say ‘things have become too complicated now’ are looking at only one side of the balance sheet.
Look at the case of the US. I sometimes joke that the most successful SOE in human history has been the U S military. Its unbelievable – all the key technologies of the modern information economy came from military research. Computers and the Internet, they were developed by the Pentagon; few people know this but the semiconductor was first developed by the US Navy. My friend Marianna Mazzucato has a chapter in her book ‘The Entrepreneur State’ showing that almost every piece of technology behind the iPhone was originally created by the US military. If growing complexity of the economy makes it impossible for the government positively contribute to economic development, this kind of thing should not have happened.]]>